How Pensions will change from April 2027

From April 2027, major changes to inheritance tax (IHT) rules will reshape how pensions are treated in estate planning.

For many years, defined contribution pensions (including SIPPs and most workplace pension schemes) have usually sat outside a person’s estate for inheritance tax purposes. This made pensions one of the most tax-efficient ways to pass wealth to future generations. That is about to change.

What is the change?

From 6 April 2027, unused pension funds and certain death benefits will generally be included within the value of an estate when calculating inheritance tax liability. Currently, inheritance tax is charged at 40% on estates above the available allowances, including:

• The £325,000 nil-rate band
• The residence nil-rate band of up to £175,000 for qualifying family homes

Many people have deliberately preserved pension wealth while spending other assets first, such as ISAs or cash savings, because pensions could often be passed on tax-efficiently. The new rules may make this strategy less attractive.

Who could be affected?

The changes are most likely to impact:

• Individuals with large pension pots
• Higher-value estates already close to IHT thresholds
• Families using pensions as part of inheritance planning
• Retirees intending to leave unused pension wealth to children or grandchildren

For some families, the reforms could significantly increase the inheritance tax payable on death.

Potential double taxation

The reforms may create a double-tax charge in certain cases. If someone dies after age 75, beneficiaries already pay income tax when withdrawing inherited pension funds. From April 2027, those same pension funds could first face inheritance tax before income tax is later applied to withdrawals. This reduces some of the historic tax advantages associated with passing on pension wealth.

Will all pensions be treated the same?

Not entirely. The changes mainly affect unused defined contribution pension funds and some lump-sum death benefits. Defined benefit pensions are generally less exposed because they usually provide retirement income rather than a transferable investment pot. However, every pension arrangement is different, and scheme-specific rules will still matter.

How retirement planning may change

The reforms are expected to alter retirement and estate-planning strategies. In the past, advisers often recommended drawing income from taxable investments or savings first while leaving pensions untouched for as long as possible. From 2027 onwards, retirees may increasingly consider using pension funds earlier in retirement rather than preserving them solely for inheritance purposes.

Planning considerations could therefore include:

• Reviewing pension beneficiary nominations
• Reassessing drawdown strategies
• Making greater use of lifetime gifting
• Considering life assurance to offset potential IHT liabilities
• Reviewing the balance between income tax and inheritance tax planning

The most suitable strategy will depend on personal circumstances, including estate value, retirement income needs and family objectives.

Why the government is making the change

The government says the reforms are intended to ensure pensions are used primarily for retirement income rather than as inheritance tax planning vehicles. The measures are also expected to increase future tax revenues.

What should investors do now?

Although the changes do not begin until April 2027, this is an important time to review existing financial plans.

Key steps may include:

• Understanding the total value of your estate
• Reviewing pension arrangements alongside wider estate planning
• Updating beneficiary nominations where necessary
• Considering future withdrawal strategies
• Seeking professional financial advice

Importantly, pensions will still remain highly tax-efficient savings vehicles during retirement, particularly because of the income tax relief available on contributions.

In Summary

The April 2027 pension reforms represent one of the biggest changes to UK estate planning in recent years. For wealthier families, pensions may no longer offer the same inheritance tax advantages they once did. As a result, retirement income planning and intergenerational wealth strategies are likely to evolve significantly over the next few years. Reviewing plans early could help families adapt to the new rules and avoid unnecessary tax exposure.

Please note that this article does not constitute financial advice, and you should always consider taking professional advice before making financial decisions. Indeed, it’s important to consider seeking professional advice to explore the best options for your needs. Your Dentons Adviser can help you work out the right option for your personal circumstances.